Compound interest is important for anyone making investments or repaying loans to understand how to profit the most from interest. Depending on whether compound interest is being earned or paid on a sum, it could either make a person much more money or cost them much more on a loan than simple interest.
What Is Compound Interest?
Compound interest is interest on a principal sum and any of its accrued interest often called interest-on-interest. It is most commonly calculated when reinvesting earnings gained from interest on a sum back into the original deposit, thus greatly increasing the amount gained by the investor.
Simply put, when interest is compounded, it is added back into the original sum.
Calculating Compound Interest
The formula used to calculate compound interest is M = P( 1 + i )n. M is the final amount including the principal, P is the principal amount (the original sum borrowed or invested), i is the rate of interest per year, and n is the number of years invested.
For example, if a person got 15% interest on a $1,000 investment during the first year-totaling $150-and reinvested the money back into the original investment, then in the second year, the person would get 15% interest on $1,000 and the $150 that was reinvested.
Practice Making Compound Interest Calculations
Understanding how compound interest is calculated can help when determining payments for loans or the future values of investments. These worksheets provide many realistic compound interest scenarios that allow you to practice applying interest formulas. These practice problems, along with strong background knowledge in decimals, percentages, simple interest, and interest vocabulary, will prepare you for success when finding compound interest values in the future.
Answer keys can be found on the second page of each PDF.
Compound Interest Worksheet #1
Print this compound interest worksheet to support your understanding of the compound interest formula. The worksheet requires you to plug the correct values into this formula to calculate interest on loans and investments that are mostly compounded annually or quarterly.
You should review the compound interest formulas to help you determine what values are required for calculating each answer. For additional support, the United States Securities and Exchanges Commission website features a useful calculator for finding compound interest.02of 05
Compound Interest Worksheet #2
The second compound interest worksheet features interest compounded more frequently, such as semiannually and monthly, and larger initial principals than the previous worksheet.03of 05
Compound Interest Worksheet #3
The third compound interest worksheet includes more complex percentages and timelines with loans and investments on a much larger scale. They allow you to apply your understanding to real-life scenarios such as taking out a loan on a car.04of 05
Compound Interest Worksheet #4
This compound interest worksheet again explores these concepts but delves deeper into long-term compounding interest with formulas for this type of interest used most frequently by banks than simple interest. It covers large loans taken out by businesses and individuals making considerable investment decisions.05of 05
Compound Interest Worksheet #5
The final compound interest worksheet provides a comprehensive look at applying the compound interest formula to just about any scenario, with principal sums of many sizes and varied interest rates to consider.
With these core concepts in mind, investors and loan recipients alike can capitalize on their understanding of compound interest by allowing them to make the right decisions about the most beneficial interest rates.